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All employee share plans
All employee share plans are those that any employee in the business can sign up to generally irrespective of their performance. In other words, they do not need to be specifically invited as would usually be the the case for Deferred Compensation Plans or Long Term Incentive Plans. These kinds of plan are particulary relevant in the UK as the HMRC (UK tax department) currently has two types employee share plans that they permit certain tax advantages for. These two types of plan are summarised below. Save As You Earn (aka SAYE or Share-Save) A SAYE scheme is effectively an HMRC-approved Employee Share Option scheme, set up by a UK employer, under which employees are given a right, known as a 'share option', to buy a certain number of shares normally at a special, pre-determined discounted price at a particular time in the future. Employees save pre-specified amounts from their net salary every month in order to pay for their agreed number of shares at the time of the option maturation. At the time of writing, employees at elibile companies can sign up for a 3 or 5 year savings contract and can save between £5 and £250 per month. A tax-free bonus may also be added to an employee's savings account at the end of their savings period. The value of this bonus is determined by the HMRC, dependent on current interest rates, and is set at the commencement of the savings contract. At the completion of the savings contract the employee has six months to decide what to do with their allocated shares. They can either purchase the shares using the money they have saved or simply retain their savings including any applicable tax-free bonus. Employees will generally exercise their share option if the current price of their shares is higher than what they have effectively paid via their savings contract. If the current share price is less than the option price then the employee would almost certainly retain their savings. Employees also have the option to extend a 5 year savings contract to 7 years in order to recieve an additional tax-free bonus, if applicable. In this instance, however, their share option will lapse. Capital Gains Tax (CGT) is not applicable to the increase in value of the share option, although once the employee has exercised the share option into shares, CGT will be applicable as if the shares were bought out right on the open market. I.e., CGT will be applicable to the appreciation in value of the shares from the point of actual ownership. See the HMRC guidance for employees . Share Incentive Plan A Share Incentive Plan is a tax and National Insurance Contributions (NICs) advantaged plan that helps employers to encourage employees to hold shares in the company or group they work for. There are four types of shares relevant to Share Incentive Plans: *Partnership Shares *Matching Shares *Dividend Shares *Free Shares For Partnership Shares, an employee is able purchase up to the lower of £1,500 or 10% of their gross salary worth of their company's shares in one tax year either via a lump sum payment or monthy payments from their pre-tax and pre-NIC pay. Their employer is then able to grant tax and NIC-free Matching Shares up to a ratio of 2 Matching Share to 1 Partnership Share. In order to qualify for the tax and NIC savings, the employee must retain their Partnership Shares for at least 5 years and Matching Shares can have a 3 to 5 year withholding period applied to them by the company. If Matching Shares come out of the plan between 3 and 5 years then tax is payable on the lesser value of the market value at the date of award and on ceasing to be subject to the plan. After 5 years the Matching Shares are tax-free. Any dividends can be reinvested by the company in the form of further shares up to a limit of £1,500 Dividend Shares per year. Employees do not have to pay income tax on these reinvested dividends as long as the shares you buy with their dividends are held in the plan for at least three years. An employer is also able to grant up to a maximum of £3,000 Free Shares to each employee per year. Employers can base the allocation of these shares dependent on performance although all employees must be eligible (in accordance with the HMRC rules of the plan) and any performance measures must be objective and fairly applied across the company. As with the other types of employer-awarded shares, the minimum holding period of Free Shares is 3 years and up to 5 years at the employer's discretion. In the case where Free Shares are taken out of the plan before 5 years, tax is payable on the lesser value of the market value at the date of award and on the date they were taken out of the plan. After 5 years the Free Shares are tax-free. See the HMRC guidance for employers and the HMRC guidance for employees .